Oklahoma: The Inverted Federalism of Grider v. Compaq

In Phillips Petroleum Co. v. Shutts, the U.S. Supreme Court held that due process prohibits a state from imposing its law extraterritorially upon transactions with no connection to the state.¹ A 2003 decision in Oklahoma, however, does just that, creating fifty state classes under choice-of-law principles, even though the Oklahoma legislature would be forbidden from doing so.² A recent unreported Oklahoma case, Grider v. Compaq Computer Corp., applies Texas consumer law on a nationwide basis—even as the Texas Supreme Court has held that such law is inapplicable outside of Texas.³ Grider’s class certification raises troubling questions of due process, the Full Faith and Credit Clause, and public policy.

On June 4, 2003, Stephen and Beverly Grider sued in Oklahoma state court, alleging that Compaq breached its express limited warranty by selling computers with purportedly defective floppy disk controllers (“FDCs”). They sought to represent a putative nationwide class of approximately 1.7 million purchasers of certain Compaq computers. As was common in the days before the Class Action Fairness Act (CAFA),⁴ the Grider suit was forum-shopping: identical claims on behalf of an identical class had been filed by the Griders’ counsel in Texas state court in January 2000. Plaintiffs’ experts were unable to generate malfunctions through normal use of the computer, and the named plaintiff had no evidence of injury. Rather, Grider alleged that the computers were “defective in the box,” because their FDCs allegedly did not comply with unspecified industry standards or Compaq specifications.

In the Texas suit, a trial court had certifi ed a proposed nationwide class, and the court of appeals affirmed, holding that it “believed” it could apply Texas law to the nationwide class.⁵ The Supreme Court of Texas reversed, noting that while the case involved a claim of a breach of express warranty under the Uniform Commercial Code, the UCC is not uniform across all fifty states.⁶ Thus, the court held that a choice-of-law analysis must be applied to satisfy the due process standard of Shutts, and that, absent a contractual choice-of-law provision, Texas law would apply lex loci delicti—the law of the place of injury—rather than a law of the manufacturer’s domicile.⁷ After all, when a Texas consumer sued an out-of-state manufacturer over a contract made in Texas, Texas courts would apply the Texas consumer protection law; thus, the Texas consumer protection law was intended to compensate Texas consumers adequately, rather than to deter Texas businesses.⁸ Other jurisdictions had a similar interest in ensuring their consumers were adequately compensated under their state’s consumer protection law. Texas consumer protection law thus could not apply to a fifty-state class under Texas law or Shutts. In the absence of consistent law, the class could not be certified. Such a result is hardly surprising; it is how the vast majority of courts to evaluate such allegations have proceeded.⁹

After LaPray was remanded to the trial court in Beaumont, the plaintiffs proceeded instead in their second-choice forum, Oklahoma, once again arguing that Texas law applied to the nationwide class. Here, however, they could rely upon a 2003 Oklahoma Supreme Court case, Ysbrand v. DaimlerChrysler Corp.,¹⁰ which affirmed the certification of a nationwide class action on breach of warranty claims against the automaker, using a law of the manufacturers’ principal place of business principle.¹¹ The trial court held that Texas law would apply to all members of the putative Grider class—regardless of their individual state of residence—and refused to recognize the Texas Supreme Court’s decision in LaPray as controlling on this question of the applicability of Texas law.

The trial court certified this interlocutory question to the Oklahoma Supreme Court, but that court denied review, whereupon the trial court certified the same class that the Texas Supreme Court had decertified. The Oklahoma Court of Civil Appeals affirmed in an unpublished opinion, relying upon Ysbrand. Compaq sought review in the Supreme Court of Oklahoma; the state of Texas filed an amicus brief seeking proper application of its laws. But the Oklahoma Supreme Court denied certiorari, and a further appeal was similarly fruitless; the U.S. Supreme Court denied certiorari at the beginning of this term.¹²

As is common when faced with gigantic certified classes where damages could be enormous if the case were fully litigated, the defendant agreed to a settlement. Subject to a fairness hearing in April 2008, class members will receive coupons in future purchases; the plaintiffs’ attorneys are due to request $48.5 million in fees, notwithstanding the uncertainty of the eventual redemption value of the coupons or the fact that Compaq can pass the cost of the coupon program onto its future customers if it accurately anticipates the redemption rate.

The theory of suit raises questions as a matter of public policy. When damages are awarded without harm to the plaintiffs, there is inefficient over-deterrence.¹³ But the problem is magnified by the Oklahoma court’s disregard for the Texas court’s decision. The state court recognized a national cause of action that neither the Oklahoma nor the Texas legislature—much less the federal legislature—had created. The problems under the Full Faith and Credit Clause.

The problems under the Full Faith and Credit Clause are the most obvious. Plaintiffs lost in the Texas Supreme Court, and took the proverbial second bite at the apple in Oklahoma, where Oklahoma courts gave them a reading of Texas law that Texas courts rejected. An error in interpreting state law does not by itself violate the Full Faith and Credit clause, but a court cannot “contradict law of the other State that is clearly established and that has been brought to the court’s attention.”¹⁴

CAFA largely eliminates this sort of litigation tactic, where plaintiffs are permitted to seek any number of class certifi cations until they find a court willing to grant one.¹⁵ Under CAFA, defendants are able to remove putative nationwide classes to federal court, where multiple identical class actions can be consolidated. The plaintiffs’ bar, however, can continue to avoid federal consolidation through smaller class actions of under $5 million (where no CAFA jurisdiction rests) or through federal courts that narrowly interpret the statute to refuse to grant removal jurisdiction where the amount in controversy could be, but is not necessarily, $5 million.¹⁶ Oklahoma courts’ decision in Grider, a natural consequence of Ysbrand, effectively turns its court system into an appellate court to collaterally attack the decisions of other state courts interpreting their state law.

The implications for federalism and separation of powers are thus also significant. Under Shutts, both Texas and Oklahoma are prohibited from creating a fifty-state statute subjecting other states’ citizens to their law without significant contacts. Yet the courts have done this through “choice of law.” In an example of what Michael Greve calls “upside-down federalism,” Oklahoma state courts are now engaging in national regulation of consumer markets: exercising jurisdiction to hear claims of non-Oklahoma plaintiffs against non-Oklahoma defendants, while at the same time creating a hybrid Oklahoma/Texas law to resolve those claims created neither by the Texas nor the Oklahoma state legislatures and explicitly rejected by the Texas Supreme Court, as well as by Congress, which rejected the idea of amending CAFA to permit such fifty-state classes.¹⁷

Meanwhile, in Klaxon v. Stentor Manufacturing Co., the U.S. Supreme Court held that the Erie doctrine required federal courts to apply the choice of law of the underlying state.¹⁸ Thus, if a federal court heard a class action filed in Oklahoma and chose to honor Klaxon over Shutts, it could create the national cause of action that Congress rejected.¹⁹ Such a conflict should not occur, however. Shutts is a matter of constitutional law, while the Court’s holding in Klaxon does not rise to that level.²⁰

Other state supreme courts, when faced with such a situation, have usually recognized the limits of their authority. For example, the Illinois Supreme Court rejected a trial court’s attempt to create a nationwide cause of action over State Farm’s insurance contracts²¹ (The New Jersey Supreme Court, when faced with a certification of a nationwide class action against Merck, decertified the class on other grounds, and avoided the “choice of law” question.²²). If Oklahoma does not change its “choice of law” and federal courts do not step in to address the inconsistency with Shutts, Oklahoma could well find itself becoming the next magnet jurisdiction for overbroad consumer class actions.²³

* Theodore H. Frank is Director of the AEI Legal Center for the Public Interest and a Resident Fellow at the American Enterprise Institute for Public Policy Research.

 

Endnotes

1 472 U.S. 797 (1985).

2 Ysbrand v. DaimlerChrysler Corp., 81 P.3d 618 (Okla. 2003).

3 Unreported decision from Oklahoma, cert. denied, 128 S.Ct. 378 (2007).

4 Ted Frank, The Class Action Fairness Act Two Years Later, 2 Liability Outlook No. 2, March 2007; John H. Beisner & Jessica Davidson Miller, They’re Making A Federal Case Out of It... In State Court, 25 Harv. J. L. & Pub. Pol’y 143 (2002).

5 Compaq Computer Corp. v. LaPray, 135 S.W.3d 657, 670 (Tex. 2004).

6 Id. at 673-74.

7 Id. at 680-81.

8 Id. at 681.

9 E.g., Avery v. State Farm Mut. Auto. Ins. Co., 835 N.E.2d 801 (Ill. 2005); State ex rel. American Family Mut. Ins. Co. v. Clark, 106 S.W.3d 483, 486-7 (Mo. 2003); In re Bridgestone/Firestone, Inc. Tires Prods. Liab. Litig., 288 F.3d 1012, 1016 (7th Cir. 2002); Spence v. Glock, Ges.m.b.H., 227 F.3d 308, 312-314 (5th Cir. 2000); In re Am. Med. Sys., Inc., 75 F.3d 1069, 1085 (6th Cir. 1996); Castano v. Am. Tobacco Co., 84 F.3d 734, 741-743, 749750 (5th Cir. 1996); Georgine v. Amchem Prods., Inc., 83 F.3d 610, 627 (3d Cir. 1996), aff’d sub nom. Amchem Prods., Inc. v. Windsor, 521 U.S. 591 (1997); Walsh v. Ford Motor Co., 807 F.2d 1000, 1017 (D.C. Cir. 1986); In re Pharmaceutical Industry Average Wholesale Price Litigation, 230 F.R.D. 61, 83 (D. Mass. 2005); Sweet v. Pfizer d/b/a Pharmacia and Upjohn, 2005 WL 3074602, *11-12 (C.D. Cal. Nov. 15, 2005); Bostick v. St. Jude Medical, Inc., 2004 WL 3313614, *12 (W.D. Tenn. Aug. 17, 2004); In re Ford Motor Co. Ignition Switch Prods. Liab. Litig., 194 F.R.D. 484, 487-490 (D.N.J. 2000); Lyon v. Caterpillar, Inc., 194 F.R.D. 206, 211-217 (E.D. Pa. 2000); Clay v. Am. Tobacco Co., 188 F.R.D. 483, 497-98 (S.D. Ill. 1999); Dhamer v. Bristol-Myers Squibb Co., 183 F.R.D. 520, 532-534 (N.D. Ill. 1998); Chin v. Chrysler Corp., 182 F.R.D. 448, 456-457 (D.N.J. 1998); In re Ford Motor Co. Vehicle Paint Litig., 182 F.R.D. 214, 222-24 (E.D. La. 1998); Tylka v. Gerber Prods. Co., 178 F.R.D. 493, 497-98 (N.D. Ill. 1998); In re Ford Motor Co. Bronco II Prod. Liab. Litig., 177 F.R.D. 360, 369-371 (E.D. La. 1997); In re Masonite Corp. Hardboard Siding Prods. Liab. Litig., 170 F.R.D. 417, 422-3 (E.D. La. 1997); Harding v. Tambrands Inc., 165 F.R.D. 623, 631-632 (D. Kan 1996); Feinstein v. Firestone Tire & Rubber Co., 535 F. Supp. 595, 605-608 (S.D.N.Y. 1982).

10 81 P.3d 618 (Okla. 2003), cert. denied 542 U.S. 937 (2004).

11 Id. at 625-26.

12 Compaq Computer Corp. v. Grider, 128 S.Ct. 378 (Oct. 9, 2007).

13 Greve, supra note 5; cf. also In re Bridgestone/Firestone, Inc. Tires Prods. Liab. Litig., 288 F.3d 1012, 1017 (7th Cir. 2002) (“Plaintiffs describe the injury as financial rather than physical and seek to move the suit out of the tort domain and into that of contract (the vehicle was not the flawless one described and thus is not merchantable, a warranty theory) and consumer fraud (on the theory that selling products with undisclosed attributes, and thus worth less than represented, is fraudulent). It is not clear that this maneuver actually moves the locus from tort to contract. If tort law fully compensates those who are physically injured, then any recoveries by those whose products function properly mean excess compensation.”).

14 Sun Oil Co. v. Wortman, 486 U.S. 717, 731 (1988).

15 Compare In re Bridgestone/Firestone, Inc. Tires Prods. Liab. Litig., 333 F.3d 763, 767 (7th Cir. 2003) (enjoining class certification efforts in other courts because any other result would create “an asymmetric system in which class counsel can win but never lose”) with In re General Motors Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 134 F.3d 133, 145-46 (3d Cir. 1998) (denial of certification “lacks sufficient finality to be entitled to preclusive effect”).

16 E.g., Lowery v. Alabama Power Co., 483 F.3d 1184 (11th Cir. 2007). See Kenneth J. Reilly & Frank Cruz-Alvarez, Has the Eleventh Circuit Set a New Standard for Federal Diversity Jurisdiction?, Class Action Watch 5 (Sep. 2007).

17 151 Cong. Rec. S1215 (S. Amdt. 4 (Feinstein), rejected by vote of 38-61 (record vote no. 7)) (Feb. 9, 2005).

18 313 U.S. 487 (1941).

19 See also discussion in Richard A. Nagareda, Bootstrapping In Choice Of Law After The Class Action Fairness Act, 74 UMKC L. Rev. 661 (2006).

20 Id. at 679; Richard H. Fallon, Jr., et al., Hart & Wechsler’s The Federal Courts and the Federal System 637 (5th ed. 2003).

21 Avery, supra note 10.

22 International Union of Operating Engineers Loc. No. 68 Welfare Fund v. Merck, Inc., 192 N.J. 372, 388 n. 3 (2007).

23 See Frank, supra note 4; see also Beisner, supra note 4.

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